Investing in Exchange Traded Funds (ETFs) could be one of the smartest moves investors can make this month. These investment vehicles have consistently proven to be terrific ways to put money to work with minimal effort. Portfolio construction, diversification, and management are all put on autopilot, growing wealth by mimicking an index like the FTSE 100.
FTSE 100 ETF investors have been having a blast since October 2023. The UK’s flagship index is up more than 15%, including dividends, almost double what it’s typically delivered in an entire year over the last decade. That’s hardly a surprise since rapid recoveries have almost always come after a severe stock market correction, like the one we saw in 2022.
But with prices already surging, is it too late to reap returns? And is there a better investing strategy to follow?
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Potential for more growth
High inflation and interest rates dragged stock valuations through the mud. In some cases, this sell-off was warranted, even among FTSE 100 companies. But not all businesses were compromised, creating buying opportunities for prudent investors.
Since the start of 2024, the stabilisation of inflation near to the Bank of England’s target has become a powerful catalyst that sparked a rally. But the growth potential may not be over. For the first time in years, interest rates have just been cut from 5.25% to 5%. It’s a small difference. But when dealing with millions or billions in debt, it makes a huge difference.
That means capital liquidity’s going up for both households and businesses. And with more money to spend on products, research, development, and marketing, growth is on track to return to the financial markets. In other words, investing in an ETF right now could yield tremendous long-term returns, especially if interest rates continue to fall.
Maximising returns
There’s always a degree of uncertainty when it comes to investing, even when using passive index strategies. After all, while the UK seems to be on track, the US is having a bit more difficulty. And it’s possible another spanner may be thrown into the works later this year.
This risk is only amplified if investors decide to go with a stock-picking strategy instead. However, volatility, while unpleasant, also creates opportunity. And by picking the right stocks, enormous returns can be unlocked that put the FTSE 100 to shame.
Take BT Group (LSE:BT.A) as an example. The business has struggled for years under multiple CEOs. And with so much debt on its balance sheet from expanding telecommunication infrastructure, it’s understandable why shares went into freefall due to interest rate hikes.
However, through a combination of restructuring and cost-cutting, the firm’s managed to achieve £3bn in annualised savings. And now that interest rates are finally moving downward, the pressure from debt is also starting to alleviate. So it’s no wonder shares are up more than 30% in the last three months alone.
The company still has a lot of progress to make to right the ship. And it may not be the best stock to buy now, given there are stronger businesses with far fewer financial burdens. However, it goes to show that with a bit of research and discipline, stock picking may be a far superior wealth-building strategy for investors comfortable with more risk.
